The average spending – and saving – of recent retirees with higher incomes increased through their 60s and 70s, as pensions increased faster than inflation in 2006 to 2018, the Institute for Fiscal Studies has found. Those on lower incomes saw their spending remain broadly flat as they moved through retirement.   

 

Among those born between 1939 and 1943, households with above-average incomes increased their annual spending per person between the ages of 67 and 75 by 7%, or £1,200, after accounting for inflation, according to the IFS. Spending increases were largely driven by higher spending on holidays and declined only once people reached their 80s; annual average spending on holidays rises by £430 between age 67 and 75. 

 

However, the composition of spending changes as people age, the IFS found. Per-person spending on food inside the home and on motoring fell steadily as spending on holidays increased up to age 80 before decreasing again, possibly related to health. As well reducing spending on leisure activities, declining health comes with expenses; spending on household services - including home help and cleaners - and household bills increased in the later years of retirement. 

 

 

For those born in 1939–43, average annual household income per person was £13,000 at age 67 and £16,000 at age 75, an increase of 24% after inflation.  

 

The increase in incomes was driven by higher state pensions – which increased by more than the consumer prices index – and more people receiving the state pension. For younger retirees, the state pension is also being added to overall income as people go through their 60s. In addition, when people age, they might receive disability benefits or survivors’ pensions.  

 

The IFS warned however that as future retirees are much less likely to have survivors’ benefits, they will need to consider how to adjust their spending if a partner dies, as bills will have to be paid by one person instead of two.  

 

The complex spending patterns of retirees combined with future pensioners’ reliance on defined contribution pots highlight the need for advice, the IFS said, as the decisions retirees make will have long-lasting implications for much of their income profile through retirement. 

  

“If the spending patterns of current retirees are a good guide to how people in the future will want to spend, planning drawdowns on the basis of reduced spending needs in later retirement may not be wise as it may result in unexpected shortfalls in living standards at older ages,” said Heidi Karjalainen, IFS research economist and an author of the report. 

  

“While average pension incomes have grown strongly with age in recent years, leaving many retirees with more resources than they chose to spend, high inflation is reducing retirees’ spending power and – along with the more uncertain outlook – makes careful financial planning all the more important,” she added. 

 

 

While retirees spent more as they received more between 2006 and 2018, the IFS found that their higher income also allowed them to save more. This was particularly true during the pandemic, when those who were already retired “have been accumulating wealth as a result of both strong stock market performance and reduced spending due to lockdowns”.  

 

But the IFS notes that this might not translate into spending post-lockdown. As retirees were already saving at increasing rates with age before the pandemic, “there is no clear evidence that people in retirement were constrained and would be going out to spend these extra savings now restrictions are lifted”, although more monitoring will be needed to assess this, the report found. 

 

If the trend of retirees saving continues just as baby boomers are retiring, combined with a ‘baby bust’ during the pandemic, this could ultimately impact economic growth.